The winding up of some Australian companies has had a significant impact on the country’s economy, as well as on the lives of the people who worked for them. In recent years, there has been a wave of corporate collapses, as businesses have struggled to cope with the economic challenges of the COVID-19 pandemic.
This article will explore the winding up process in Australia, and the impact it has on businesses and individuals. We will also look at some of the factors that contribute to the recent wave of corporate collapses, and what can be done to prevent them from happening in the future.
What Is Winding Up?
Winding up is the process of dissolving a company and distributing its remaining assets to its creditors and shareholders. There are two types in Australia: voluntary and compulsory.
1. Voluntary Winding Up
The company’s members or directors initiate this. This type can be either solvent or insolvent. In a solvent voluntary winding up, the company is able to pay all of its debts and liabilities. In an insolvent voluntary winding up, the company is unable to pay all of its debts and liabilities.
2. Compulsory Winding Up
On the other hand, the creditor or the court initiates the compulsory type. This type is usually used when a company is insolvent and is unable to pay its debts.
The first step in this process is for the creditor to make a statutory demand. A Statutory Demand is a creditor’s formal, written request requiring a company to pay a debt within the statutory period (currently 21 days).
Section 459E of the Corporations Act 2001 provides for the requisites for making a statutory demand. The demand must:
- relate to a debt or debts that are due and payable and total at least $4,000
- specify the debt and its amount
- be in writing, in accordance with the prescribed form, which is Form 509H
- require compliance with the demand within the statutory period (currently 21 days) after the demand is served on the company’s registered office
- be signed by or on behalf of the creditor, and
- if relying on a debt that is not a judgment debt, the demand must be accompanied by an affidavit that verifies the debt is due and payable by the company and complies with the rules. Moreover, the affidavit verifying the Statutory Demand must not pre-date the Statutory Demand.
Serving the demand and any accompanying affidavit on the firm serves as service of a Statutory Demand in the proper form. After service of the demand, the company must:
- comply with the demand; or
- apply to the court for an order to set aside the demand.
What if the Company Is Unable to Comply With the Demand?
According to the Corporations Act, a corporation is assumed to be insolvent if it does not respond to a Statutory Demandin the allotted amount of time.
The creditor who issued the demand may use the presumption of insolvency as the foundation for an application to the Court for orders winding up the company within three months of the date of noncompliance.
Moreover, the presumption has the effect of requiring the Court to assume that the firm is insolvent and has to be wound up, barring any proof to the contrary.
Winding Up a Solvent Company
When a solvent company is wound up, it is not because it is failing. It is because it is no longer viable to continue operating. This can be a difficult decision for the company’s owners and directors, but it may be the best option for the company and its stakeholders.
If a corporation doesn’t fit the criteria for voluntary deregistration (a company with assets worth $1,000 or more cannot be deregistered on request), it may be possible to dissolve it.
Here are the steps for winding up a solvent company:
- Company directors must make a declaration of solvency to have the company wound up,
- Company members must pass a special resolution.
- Notice of the special resolution must be published on the website
- Liquidator winds up the company’s affairs.
- Liquidator finishes winding up company and lodges final documents
For a more detailed step-by-step process, here’s the website of the Australian Securities and Investments Commission (ASIC).
Winding up an Insolvent Company
The black hole of insolvency is a place where hopes and dreams are dashed, and where creditors are left to pick over the bones of a once-thriving business.
But winding up an insolvent company is not just about death and destruction. It is also about closure and opportunity. It is a chance for creditors to get some of their money back, and for shareholders to cut their losses and move on.
The wisest move at this point is to ask a specialist for guidance as soon as you can if you believe your business is experiencing financial difficulties. This increases your company’s chances of surviving and paying off existing debt.
The first thing you need to be aware of is the company’s financial position. A business cannot trade or run its operations normally while it is bankrupt. Under the Corporations Act, trading while bankrupt may result in civil fines or criminal proceedings.
A director’s personal bankruptcy is not related to a company’s solvency. If you are bankrupt, you are disqualified from managing a company under the Corporations Act 2001.
Moreover, a creditor of an insolvent corporation may request that the court wind up the company and appoint a liquidator if the firm is not voluntarily wound up.
One resolution for this problem is voluntary administration. The goal of voluntary administration is to find the most effective strategy to end the company’s insolvency. A qualified individual, who must be a registered liquidator, is chosen as the company’s voluntary administrator in an effort to restore its financial stability.
The voluntary administrator must choose the best course of action if saving the company is not an option. In comparison to liquidation, this may result in a higher return.
Getting the Right Legal Help
Lawyers can help in winding up a solvent or an insolvent company in Australia by:
- Providing legal advice on the process, including the legal requirements, the implications for the company’s stakeholders, and the options available to the company.
- Drafting and filing legal documents, such as a statutory demand, a petition, or a liquidator’s report.
- Representing the company in court, if necessary.
- Managing the process, including collecting and distributing the company’s assets, investigating the company’s financial affairs, and dealing with creditors.
In addition to these general tasks, our team of competent lawyers at JB Solicitors can also provide specific advice and assistance on a number of issues that may arise during the process, such as:
- Tax implications.
- Liability of directors and officers for the company’s debts.
- Disputes between creditors.
- Challenging the appointment of a liquidator.
If you are considering winding up a company, it is important to seek professional advice from a lawyer. We can help you to understand your options and to make the best decision for the company and its stakeholders.
Let’s talk about your case. Contact us today.
